When Shield Credit Fund and First Guardian Wealth collapsed, taking client savings with them, the industry’s response followed a familiar script: investigate the advisers, pursue the licensees, levy the sector. But here’s what nobody wants to say out loud: the system worked exactly as designed. The problem isn’t that the Compensation Scheme of Last Resort has introduced moral hazard into financial advice. The problem is that it has revealed a structural flaw that’s been hiding in plain sight for decades.
Australia’s financial advice regulatory framework rests on a legal fiction: that advisers are gatekeepers standing between consumers and products, and that this arrangement protects clients. In reality, it has created a liability shield for product manufacturers that would be unconscionable in any other consumer market. Imagine if car manufacturers weren’t liable when their vehicles’ brakes failed, as long as the dealership had ticked the right boxes when selling them. That’s essentially how financial product liability works in Australia today.
The Illusion of Accountability
The CSLR was supposed to fix a problem: consumers left holding worthless advice when their adviser or licensee went bust. It seemed straightforward: create a safety net funded by the industry itself. But the scheme’s funding model exposed something deeper. When the levy bills went out, they landed almost entirely on advisers, even though many of the failures involved products designed, manufactured, and marketed by institutions that never got touched by the scheme.
The industry’s immediate reaction, that this creates moral hazard for bad actors, misses the point. Moral hazard has always existed in this system, just distributed differently. Before the CSLR, advisers paid higher professional indemnity insurance premiums to cover industry misconduct. PI insurers priced in the risk of systemic failures, spreading costs across the entire advisory sector. The CSLR didn’t invent this model; it made it explicit and mandatory.
What’s changed is visibility. When PI premiums rose, it was a private transaction between advisers and insurers. When CSLR levies arrive, they come with case summaries describing how products failed and consumers lost money. The mechanism of collective liability has become impossible to ignore, and with it, the question of why advisers are collectively liable for products they didn’t create.
The Corporations Act Carve-Out
To understand how we arrived here, you need to excavate the Australian consumer law’s foundations. The Australian Consumer Law, introduced in 2011, established a principles-based framework for consumer protection. At its core sits a simple proposition: if you manufacture or supply goods or services, you’re liable if they’re not fit for purpose, not of acceptable quality, or not as described. This applies to everything from toasters to legal advice to medical devices.
Except for financial products.
Financial advice sits under the Corporations Act 2001, carved out from the ACL’s reach through what corporate lawyers call “specific performance provisions”. The logic seemed reasonable at the time: financial products are complex, highly regulated, and require specialist oversight. The Corporations Act already imposed detailed obligations on advisers through its “best interests’ duty” and product manufacturers through disclosure requirements. Surely that was enough.
It wasn’t. The Corporations Act’s framework is built on disclosure and process compliance, not outcome accountability. Manufacturers must disclose risks in Product Disclosure Statements, but they’re not liable if those disclosed risks materialise, even if the product was fundamentally unsuitable for its target market from the start. Advisers must follow a best interests process, but they’re not collectively liable for systemic product failures, except that they are, through the CSLR.
This creates an accountability gap you could drive a fleet of unlisted property funds through. Product manufacturers face minimal consequences when their products fail, even when failure was predictable or design flaws were apparent. The regulatory system focuses on whether proper warnings were given and processes followed, not whether the product should have existed at all.
The Case Studies: Shield and First Guardian
Shield Credit Fund’s collapse perfectly illustrates the structural problem. The fund was marketed as providing stable income through private credit investments, targeting retirees seeking alternatives to term deposits. When it suspended redemptions and valuations plummeted, thousands of investors faced significant losses.
From a consumer protection perspective, the questions should have been: Was this product suitable for the retail market it targeted? Did its design contain inherent flaws that made failure predictable? Were adequate controls in place to prevent concentration risk and illiquidity?
Instead, the regulatory response focused on adviser conduct: Did advisers properly assess client risk profiles? Was the recommendation documented correctly? Did they follow best interests’ duty procedures?
Those questions matter. But they’re downstream from a more fundamental issue: if the product itself was unsuitable for its marketed purpose, why is liability falling primarily on those who distributed it rather than those who created it?
First Guardian Wealth’s failure followed similar patterns. Complex structures, inadequate disclosure of underlying risks, and products marketed to consumers who couldn’t realistically assess those risks. When everything collapsed, the CSLR levy mechanism kicked in, spreading costs across advisers who’d never touched these products and could not assess their structural soundness.
The Manufacturer Liability Gap
Here’s where legal frameworks diverge sharply. Under the ACL, manufacturers face strict liability for product defects. If your product causes harm because it wasn’t of acceptable quality or fit for purpose, you’re liable, regardless of how carefully you manufactured it or how many warnings you included.
This creates powerful incentives. Manufacturers invest heavily in product testing, quality control, and design validation because they know they’ll be held accountable for failures. The cost of poor quality gets internalised where decisions are made.
Financial products face no equivalent accountability. A fund manager can design an illiquid investment, market it to risk-averse retirees through carefully worded disclosure and face minimal consequence when it fails, as long as the PDS technically disclosed the risks. The product might have been fundamentally unsuitable for its target market from inception, but there’s no manufacturer liability for that design choice.
Target Market Determinations, introduced through the Design and Distribution Obligations regime, were supposed to address this. Manufacturers must now define who their product is appropriate for, and distributors must ensure they’re selling to that target market. But TMDs remain compliance exercises focused on documentation rather than outcome accountability. A manufacturer can define a broad target market, tick the TMD boxes, and still face minimal liability when the product proves unsuitable for many consumers within that target.
The accountability asymmetry is stark. Advisers face individual liability for each client recommendation, appropriately so. But manufacturers face no collective liability when systemic product flaws affect entire classes of consumers. The CSLR levy falls on advisers even when the underlying cause was product design failure rather than distribution failure.
The Consumer Duty Solution
Moving financial advice into the ACL framework would fundamentally shift this dynamic. A principles-based consumer duty would make manufacturers liable when products cause harm through design flaws or unsuitability, not through additional disclosure requirements, but through direct accountability for outcomes.
This isn’t theoretical. The UK implemented a Consumer Duty for financial services in 2023, requiring firms to act to deliver good outcomes for retail customers. It’s principles-based: firms must consider whether their products and services meet customer needs, provide fair value, and enable customers to pursue their financial objectives. When they don’t, firms face regulatory action and potential liability.
Australia could go further by bringing financial products directly into the ACL. This would create several layers of accountability:
Manufacturers would be liable for products that weren’t of acceptable quality or fit for purpose when marketed. An illiquid private credit fund marketed to retirees seeking term deposit alternatives would face the same scrutiny as a toaster marketed as waterproof. If the product’s design made it inherently unsuitable for its marketed purpose, the manufacturer would be liable for resulting harm.
Product design flaws that affect classes of consumers would trigger manufacturer liability. If a fund’s structure contained concentration risks that made capital losses probable rather than merely possible, the manufacturer would be accountable—not just for disclosure, but for the design choice itself.
Systemic issues affecting consumer outcomes would flow back to manufacturers. When redemption suspensions leave thousands of investors unable to access their capital, the question becomes: should this product have been marketed to retail investors at all? Under ACL principles, that question has teeth.
Advisers would remain liable for individual client matching and recommendation quality. The consumer duty doesn’t eliminate adviser accountability—it properly allocates it. Advisers are responsible for assessing whether a product suits their specific client. Manufacturers are responsible for whether the product was suitable for the market they targeted.
The Implementation Challenge
Would this create significantly more challenges for product manufacturers? Absolutely, and that’s precisely the point. The current system externalises product design risk onto advisers and ultimately onto consumers. Proper accountability means internalising that risk where design decisions get made.
Product manufacturers would need to fundamentally reassess their development processes. Instead of asking “have we disclosed the risks adequately?” they’d need to ask “should this product exist for this market at all?” That’s a harder question with real commercial consequences.
Some product categories might disappear entirely. Highly illiquid investments marketed to retail investors seeking capital preservation would struggle to meet a fit-for-purpose test. Complex structured products that require sophisticated financial knowledge to evaluate might be restricted to wholesale markets. Products with inherent conflicts of interest, where the manufacturer’s returns depend on outcomes that harm consumers, would face intense scrutiny.
Licensees would also face pressure. Platform operators who profit from shelf space arrangements with product manufacturers would need to demonstrate that their distribution agreements don’t compromise their consumer duty. Manufacturing-aligned licensees would face questions about whether their product distribution serves client outcomes or manufacturer interests.
The regulatory burden would shift. Instead of focusing on disclosure compliance and process documentation, regulators would assess product outcomes and manufacturer accountability. When products systematically fail to deliver promised outcomes, manufacturers would face penalties, not just for disclosure failures, but for the underlying design choices.
This wouldn’t eliminate all product failures. Market risks are real, and even well-designed products can underperform. But it would eliminate a category of failure that’s currently common: products that were predictably unsuitable for their target market but passed regulatory scrutiny through adequate disclosure.
Why This Matters Now
The financial advice industry is at an inflection point. Advice numbers are declining, costs are rising, and accessibility is shrinking. The CSLR levy is accelerating adviser exits, concentrating the remaining industry among institutional players.
Meanwhile, product complexity is increasing. Private credit, alternatives, and structured products are flowing into retail portfolios, often replacing simpler investments that consumers could reasonably evaluate. The gap between product sophistication and consumer understanding is widening precisely when accountability mechanisms are proving inadequate.
The regulatory response has been more rules. Design and Distribution Obligations added documentation requirements. Quality of Advice reforms promise lighter process obligations but maintain the same accountability framework. None of this addresses the fundamental problem: manufacturers face minimal consequences when their products fail consumers.
The CSLR’s funding crisis makes this structural flaw impossible to ignore. When levies spike because of product failures, advisers rightly ask: why are we paying for products we didn’t create? The answer, because the legal framework shields manufacturers from accountability, is no longer acceptable.
The Path Forward
Moving financial advice into the ACL framework requires legislative change. The Corporations Act’s carve-out for financial products needs to be removed or substantially modified. This won’t happen quickly; vested interests benefit from the current system, and institutional resistance will be fierce.
But the case for change is strengthening. As CSLR levies reveal the true cost of manufacturer immunity, political pressure will build. Consumer advocates, already critical of the current system, would support principles-based accountability. Advisers, tired of bearing collective liability for products they didn’t create, have a growing incentive to push for reform.
The argument against change, that financial products are too complex for ACL principles, doesn’t withstand scrutiny. Medical devices, legal services, and engineering consultancy all involve complex risk assessment and specialist knowledge. They operate under consumer protection frameworks that hold providers accountable for outcomes, not just processes. Financial products aren’t special; they’ve just been treated as special for too long.
A consumer duty framework would transform how products get designed, manufactured, and distributed. Manufacturers would need to demonstrate, not just document, that their products serve consumer needs. Distribution arrangements would be scrutinised for conflicts that compromise outcomes. Platforms would need to show that their product selection serves clients, not shelf space revenues.
This would be messy, expensive, and disruptive. Good. The current system is neat, efficient, and fundamentally flawed. It protects everyone except consumers and makes advisers collectively liable for systemic failures they can’t control.
The CSLR didn’t create moral hazard in financial advice; it exposed an accountability gap that has existed since financial products were carved out from consumer protection law. The industry’s response shouldn’t be to patch the CSLR funding model or adjust levy allocations. It should be to fix the underlying framework that makes collective liability necessary in the first place.
Time to stop treating financial products as special and start treating consumers as protected. The legal framework exists. We just need to apply it.
